Iranian oil rigs off the coast of the Persian Gulf (May 2018)TradeArabia

U.S. policy to deny Iran oil revenue is an existential threat to the survival of the Islamic Republic. And Washington is doing it through a Reagan-like economic warfare toolbox.

Iran’s oil exports are down sharply since the beginning of August as big buyers like China and India curtail their purchases in anticipation of U.S. sanctions. The Islamic Republic’s crude sales dropped by 600,000 barrels to 1.68 million barrels per day (b/d) in the first half of August, a 20% decrease from the same time in July. Exports are down a whopping 62% since May, when Iranian oil sales reached a record 2.7 million b/d.

The falloff marks the fourth straight month of declining exports for the Islamic Republic, which coincides directly with President Donald Trump’s May 8th withdrawal from JCPOA (Joint Comprehensive Plan of Action), also known as the Iran Deal. The termination of the U.S.-Iran agreement means a re-imposition of sanctions that the United States lifted two years ago. The end of sanction relief will come in two stages, the first of which began on August 7th. These include restrictions on the following

Iran’s purchase of U.S. currency;

Iran’s trade in gold and other precious metals; and

the sale to Iran of auto parts, commercial passenger aircraft, and related parts and services

The second and more significant stage will come into effect on November 4th, wherein sales of oil, gas, and refined petroleum products will be restricted. Iran’s petroleum sector is the heart of its economy: in 2016 Iranian crude sales were valued at $36 billion. Countries (specifically their central banks) which continue to buy oil and petroleum products from Iran after the deadline may be subject to secondary sanctions, greatly limiting their ability to do business in and with the U.S.

To enforce the sanctions, the U.S. is planning to diplomatically and economically strong-arm countries which currently buy oil from Iran, aiming to cut global imports by 1 million b/d. Secretary of State Mike Pompeo said that the “focus is to work with countries importing Iranian crude oil to get imports as low as possible by November 4.” National security advisor John Bolton doubled-down on Pompeo’s words, stating that “The U.S. is prepared to use sanctions to drive Iranian oil exports down to zero.”

Chinese and India purchases of Iranian crude oil and condensate:

Destination

August

July

June

May

China

615,688

799,452

722,100

751,645

India

203,938

706,452

670,433

710,936

July saw many of Iran’s top buyers actually increase their purchases, as refiners rushed to secure as many cargoes as possible before the first round of U.S. sanctions come into effect. According to Platts S&P Global, tanker loadings to Iran’s largest customer – China – reached 800,000 b/d up from 722,000 b/d in June. India – Iran’s second largest buyer – also boosted its intake in July, adding 40,000 b/d month-over-month. Japan nearly doubled its purchases of Persian crude between May and July, climbing from 106,000 b/d to 185,000 b/d. Japanese officials traveled to Washington earlier this month to obtain a temporary exemption to the November 4 sanctions, but have so far been unsuccessful.

August however saw a reversal of these trends, with both China and India significantly reducing their purchases ahead of the November deadline. In the first two weeks of August – the latest data available -- Chinese imports fell nearly 200,000 b/d down to 615,000 b/d. India’s reduction was much sharper, dropping from 706,000 b/d to 204,000 b/d – a 72% contraction. South Korea, once a top 10 importer, brought its imports to zero last month. The first 16 days of August resulted in a 20% decline in Iranian oil exports compared with the first 16 days of June. This figure would have been much higher had it not been for purchase upticks from certain European countries including Greece, Italy, and Turkey cashing in on discounted Iranian oil.

For its part, Tehran is doing what it can to retain its customers and keep exports from dropping further. These measures include offering cargo insurance (Indian insurers have stepped back from covering cargoes originating from Iran) as well as absorbing the cost of shipping. To safeguard these unprecedented incentives, Chinese buyers are starting to shift all imported Iranian crude oil to vessels owned by National Iranian Tanker Co (NITC), as per a deal between Chinese oil giant Sinopec and National Iranian Oil Corp.

Tehran is also threatening to close the strategic Strait of Hormuz – where 20 million barrels of the world’s oil transits every day – as a last-ditch effort to deter the November 4 mandate. This is the “nuclear option” (pun intended) as such a move would be tantamount to a declaration of war on the U.S. and its allies.

Would the Ayatollahs really risk their self-preservation over a few million barrels of oil? Probably not. Then again, no one thought the Empire of Japan would either.

James C. Grant, Program Manager at International Market Analysis Ltd., contributed to this article

I am a Senior Fellow at the Atlantic Council and the Founding Principal of International Market Analysis, a Washington, D.C.-based global risk advisory boutique. I advise law firms and corporations, and once helped to get a famous Russian oligarch out of Putin’s jail. I am a...